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1. Temporary differences
1. Temporary differences
1.1. Conceptual underpinnings
1.1. Conceptual underpinnings
The revenues and expenses (and gains and losses) included on the tax return may differ from those reported on the company’s income statement for the same year.
Why? The objectives of financial reporting and those of taxing authorities are not the same:
Financial accounting standards are established to provide useful information to investors and creditors
Congress establishes tax regulations to
Allow it to raise funds in a socially acceptable manner
Influence the behavior of taxpayers
Temporary differences:
Arise when tax rules and accounting rules recognize income in different periods.
The issue is not whether an amount is taxable or deductible, but when.
Originate in one period and reverse, or turn around, in one or more subsequent periods.
1.2. Deferred tax assets and deferred tax liabilities
1.2. Deferred tax assets and deferred tax liabilities
If tax laws allow a company to postpone paying taxes on activities reported in the current period’s income statement, the company must report a deferred tax liability because the company anticipates those activities will lead to future taxable amounts.
If tax laws require the company to pay more tax than is indicated by the activities reported in the current period's income statement, the company reports a deferred tax asset reflecting the benefit of future deductible amounts.
Each year’s tax expense reported in the income statement includes not only a current portion related to tax payable in the current year but also a deferred portion that includes any changes in deferred tax assets and liabilities.
1.3. The 4-Step Process
1.3. The 4-Step Process
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